The objective of the current exercise of delegalisation of the existing Rs 500 and Rs 1,000 notes in our country could be as follows: 1) Removal of existing stock of black money. 2) Prevention of terrorism financing. 3) Removal of fake notes. 4) Move towards a cashless economy.
One would normally believe that there would be minimum disruption to the economy and all administrative matters would have been tied up before the measure was implemented. While there can be no two opinions on the objective of the exercise, the issues that require focus is the timing and the implementation.
Some numbers will throw light on the magnitude of the problem. The combined capacity of RBI and the Security Printing and Minting Corporation of India (SPMCIL) for printing currency notes in our country is 22 bn pieces a year. We printed 23.65 bn pieces in 2014-15 and supplied 21.19 bn pieces in 2015-16. For 2016-17, the normal indent was 24.5 bn pieces before the delegalisation exercise was carried out. Out of this, 21 bn pieces were for replacement of soiled notes and further issue of Rs 10, 20, 50, 100, 500, 1000 and additional issue of 3.5 bn pieces Rs 500 and Rs 1,000 notes. On 31 March 2016, 22 bn pieces of Rs 500 and Rs 1000 were in circulation valued at Rs 14.17 lakh crore, of which Rs 7.85 lakh crore were in Rs 500 and Rs 6.32 lakh crore in Rs 1000 denominations. So far, approximately Rs 4 lakh crore have been deposited in the banking system and another Rs 6 lakh crore can be expected to be deposited by 30 December 2016. The remaining amount of around Rs 4-Rs 4.5 lakh crore could be rendered non-functional. To that extent, the stock of black money gets removed from the system. The objective of the exercise would have been partly achieved. This presupposes exercises of dealings by the unscrupulous in the aftermath of 8 November to have been safely ensconced.
The banking system needs at least half of the surrendered deposits to be issued in cash, provided companies like Paytms and the bank issued Rupay cards in our country establish reach and ensure ease of operation. In the meanwhile, presuming non-disruptive and continuous work by the printers of currency notes in our country, we can hope to complete the printing job of additional requirement caused due to removal of old notes of Rs 500 and Rs 1000 and make cash available in the system, both in 12 months, presuming acceptance of Rs 2,000 notes by the public. This is provided there is no disruption in the economy. Experts, however, believe that it will not be so.
The most important disruption expected will be from the rabi crops. Assuming that rabi contributes to half of non-processed agricultural economy, disruption due to non-availability of cash for inputs and labour could shave 1% off the current year’s GDP growth. The non-formal economy in both semi urban and rural areas, which depends on cash, is already facing difficulties and a large number of unorganised sector enterprises may not be in a position to let forego the current cash deployed and hope to get cash in the future for business at affordable cost. The cost of managing the entire operation of making available cash to the extent legally required after delegalisation of the current Rs 500 and Rs 1000 notes will also be much higher than the cost of printing the fresh replacement notes. Experts estimate a drop of 1%-1.5% to GDP this year and 1% next year. Perhaps this exercise may to some extent soften uptick in inflation that would arise due to the introduction of GST.
Could it have been timed otherwise? It is possible that the exercise could have been done in January 2017 as by then the rabi crop would have been almost through.
How else could this have been implemented? The standard way of keeping some stock of freshly printed new series notes at the vaults and announcing delegalisation of the existing notes along with implementing the current administrative regime could have been helpful. But changes in rules on a daily basis costs further to the economy. Perhaps the administration could not assess in detail the note availability issue due to the secrecy of the operation? Another way could have been to convey on 8 November 2016, that the notes printed up to 2016 would not be legal tender from 1 April 2017 and all such delegalised notes should be deposited in the bank accounts only and withdrawn whenever necessary. Meanwhile, printing of new notes should have been carried out with full vigour. Banks would also have opened the necessary accounts by then. Even if many transactions of dubious nature would have taken place in the meanwhile, those currency notes that would have been deposited and passed tax scrutiny will alone become legally usable. The remaining stock of non-legal money will go out of the system.
Let us examine the removal of fake notes. Certainly fake notes to the extent of Rs 500 crore would go out of the system and is therefore welcome. The downside is that the replacement notes all have the same security features as before, except that there have been some changes in the design. The M features, watermarks, OVI (optically variable ink) and the security thread remain the same and have not undergone any changes, as decided to be carried out in 2012 to make it difficult for manufacture of fake notes.
The benefits to the economy will certainly be improved tax collections to reduce fiscal deficit, reductions in repo rates and therefore in interest rates for the investor and other borrowers, improved CASA and reduced operating costs of banks and reduced interest outgo for government in its budget due to reduction in G Secs. There will be a significant move to adapt to cashless economy and businesses that could take advantage of the changed scenario will be the rising stars.
The intention of this exercise is undoubtedly beneficial to the economy and the political executive must be congratulated for taking this bold step against heavy odds. It could have been implemented better so that the political executive would have fully reaped the benefit of this exercise.
R. Gopalan last served as Member, PESB. He was Secretary in the Ministry of Finance in the Department of Economic Affairs and in the Department of Financial Services. An IAS officer from Tamil Nadu, he conducted negotiations at the WTO on behalf of India.